China: Credit indicators mixed amid market turmoil
July 12, 2013
New yuan loans totalled CNY 861 billion (USD 140 billion) in June, coming in above the CNY 667 billion seen in the previous month. Furthermore, the result exceeded market expectations of loans totalling CNY 800 billion. The figure was, however, well below the CNY 920 billion observed in the same month last year. In the 12 months up to June, new yuan loans totalled CNY 8.4 trillion (May: CNY 8.5 trillion).
In addition, total social financing - a broader measure of liquidity in the economy that includes loans, bonds and other non-traditional instruments - dropped to the lowest level in 14 months, falling from CNY 1.2 trillion in May to CNY 1.0 trillion in June (June 2012: CNY 1.8 trillion).
M2, the broadest measure of money supply in China, rose 14.0% year-on-year in June (May: +15.8% yoy). The figure undershot market expectations which saw M2 growth slowing moderately to 15.2%. The figure represents the lowest reading in six months.
Concerns about a possible credit crunch took centre stage in June after China's interbank interest rates shot up. Earlier that month, interbank rates soared in the period leading up to the Dragon Boat Festival holiday - an increase in demand for cash before holidays is common. While the market expected that the People's Bank of China (PBOC) would intervene after the festivity in order to bring down money market rates and bolster liquidity, the Central Bank refused to inject more funds into the cash-starved banking system, causing tensions in the financial market and driving rates up further.
The market turmoil continued in the following weeks while Central Bank refused to take decisive action. The overnight Shanghai Interbank Offered Rate (SHIBOR) hit an all-time high of 13.44% on 20 June prompting the PBOC to inject funds into select financial institutions. Five days later, the PBOC decided to suspend the issuance of central bank bills and repurchase operations on the open market in order to help relieve the liquidity shortage. According to analysts, the credit crunch was a signal from the PBOC that the banking system should keep risky lending under control and that banks have to comply with the Central Bank's policy guidelines.
The government's M2 growth target for this year is 13.0%. FocusEconomics Consensus Forecast participants expect M2 will expand 13.8% in 2013, which is unchanged over the previous month's forecast. In 2014, the panel sees M2 growth at 13.0%.